Government may give FDI nod for food e-tailers like BigBasket, Grofers and others

At a recent meeting between industry officials and senior government officials, it was also discussed if the definition of food should be expanded to include grocerySagar Malviya&Ruchika Chitravanshi | ET Bureau | Updated: April 05, 2016, 09:54 IST

Picture source: ThinkStockThe government is considering allowing foreign direct investment in online retailing of food products to bring it on a par with a budget proposal to permit full FDI in the sale of such items through brick-and-mortar stores provided they are sourced and processed in India. "There should not be any discrimination on offline and online.

The idea is to drive food consumption sourced from India and it can happen through any medium. As ecommerce is the future of retail, any policy that is framed on internal trade should not exclude the new growing avenues to serve the customer," two people aware of the development said.

At a recent meeting between industry officials and senior government officials, it was also discussed if the definition of food should be expanded to include grocery.

"No final view has been taken on this matter," said a senior official of the Department of Industrial Policy & Promotion, asking not to be identified. The objective of the budget proposal for foreign investment in food retail was primarily to benefit the food processing industry and farmers. However, food earns one of the lowest margins for retailers, an issue that has been plaguing the industry.

"The draft policy could also look at changing the definition of food product marketing to grocery and personal care items retailing while drafting the policy," the official added.

Food and grocery accounted for almost 50% of the overall retail basket, although online penetration is still less than 1%, suggesting the infancy of the category and its potential opportunity. Morgan Stanley expects the food and grocery segment to become the fastestgrowing category, expanding at a compounded annual rate of 141% by 2020 and contributing $15 billion, or 12.5%, of overall retail sales.

Globally, retail giants such as Wal-Mart and Tesco get 55-60% of their sales from food and staples.

However, general merchandise, personal and home products fill up a bulk of their profit pool with net margins as high as 10-15% compared with food, which fetches 3-5%. India isn't different — the country's largest retailer Future Retail had an operating margin of 12% due to bigger contribution of food although it is trying to change that by launching several of its own brands.

Within online, fresh produce accounts for almost 20% for BigBasket and as much as 30% for Grofers, while packaged food products contribute another 35-40% of total sales. "While selling food products would help farmers and small business, retailers will have to look at other groceries and household products to earn profit and remain sustainable," said one official.

However, last week, the DIPP said 100% FDI is allowed only in ecommerce marketplaces and not inventory-based models. The new policy could now pave the way for ecommerce grocers, especially those that have inventory-based models such as BigBasket, the country's largest online grocer.

"Our business remains FDIcompliant. The notification is very progressive and ensures a level playing field and the intention is to legitimise online business. While we don't see any concern, we are awaiting for more clarifications on finer details," said Vipul Parekh, cofounder of BigBasket, which has so far raised $220 million mainly from foreign investors.